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Financial Economics — an Investment Actuary's Viewpoint

Published online by Cambridge University Press:  10 June 2011

R.S. Clarkson
R.S. Clarkson
Affiliation:
Cherrybank, Manse Brae, Dalserf, Larkhall, Lanarkshire, ML9 3BN, U.K. Tel: +44 (0)1698 882451
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Abstract

The paper compares and contrasts the theories and methodologies of financial economics with generalisations drawn from practical experience of institutional investment management. A Dynamic Equilibrium Model is put forward as a much more realistic theoretical framework than the Sharpe Diagonal Model, a downside theory of risk is developed from sports analogies, and a detailed model of human behaviour, incorporating benchmark levels of ‘unintelligent’, ‘intelligent’, ‘optimal’ and ‘rational’ behaviour, is suggested as a replacement for the very restrictive simplifying assumptions of existing theories. On the basis of a classification system derived from parallels with the history of astronomy, it is concluded that, as a scientific framework, the current theories of financial economics are seriously incomplete, the two crucial areas of incompleteness being the absence of a downside theory of risk and the absence of a realistic model of human behaviour under conditions of risk and uncertainty.

Keywords

Financial EconomicsInvestmentRiskUncertaintyRational BehaviourModern Portfolio TheoryEfficient Market HypothesisUtility TheoryStochastic Models
Type
Sessional meetings: papers and abstracts of discussions
Information
British Actuarial Journal , Volume 2 , Issue 4 , 01 October 1996 , pp. 809 - 972
Copyright
Copyright © Institute and Faculty of Actuaries 1996

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References

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